In these tough economic times it may be tempting for a business to fund its operations with funds it has withheld from the wages paid to its employees as federal income and employment taxes rather than depositing those amounts with the Internal Revenue Service. But the cost of doing so may be far more severe than the financial problems that caused the business to take such a course of action in the first place.
Since it is often the case that businesses will use pay payroll taxes as a last resort before their failure and collapse, owners assume that such a course of action has little practical risk for them or their businesses. Yet, that sense of comfort is far from the truth. In fact, the failure to pay payroll taxes could very well result in financial disaster for a business owner. Not only can the IRS seek to recover unpaid payroll taxes (plus interest and penalty, where applicable) from the business, but it is also authorized to seek to recover those amounts directly from the owners and/or officers of a business who were “responsible” for collecting or paying payroll taxes—the so-called Trust Fund Responsible Person Penalty—regardless of whether such individuals personally benefited from those unpaid payroll taxes. And the IRS can be expected to go after those individuals if a business fails to pay payroll taxes over a prolonged period of time.
Practical Counsel: Payroll taxes should not be thought of as a quick and cheap fix for an ailing business. Given the IRS’ vigorous efforts to collect unpaid payroll taxes, a cash starved business’ use of withheld payroll taxes to fund its operations will likely lead to its demise and the financial ruin of its owners.